Question

Barnes Company reports the following operating results for the month of August: sales $315,000 (units 5,000); variable costs $218,000; and fixed costs $70,000. Management is considering the following independent courses of action to increase net income. Compute the net income to be earned under each alternative. 1. Increase selling price by 10% with no change in total variable costs or sales volume. Net income 2. Reduce variable costs to 60% of sales. Net income 3. Reduce fixed costs by $23,000. Net income Which course of action will produce the highest net income Click if you would like to Show Work for this questio Alternative 2 Alternative 1 Alternative 3

Answer 1

1.
Current Sales	$315,000
Units Sold	$5,000
Current Sales Price	$63
Current Sales Price	$63.00
Increase in Sales Price by 10%	$6.30
New Sales Price	$69.30
Computation of Net Income
Sales	$346,500
Less: Variable Costs	$218,000
Less: Fixed Costs	$70,000
Net Income	$58,500
2.
Current Sales	$315,000
New Variable Costs @ 60% of Sales	$189,000
Computation of Net Income
Sales	$315,000
Less: Variable Costs	$189,000
Less: Fixed Costs	$70,000
Net Income	$56,000
3.
Current Fixed Costs	$70,000
Less: Reduction in Fixed Costs	$23,000
New Fixed Costs	$47,000
Computation of Net Income
Sales	$315,000
Less: Variable Costs	$218,000
Less: Fixed Costs	$47,000
Net Income	$50,000
Net Profit in Alternative 1	$58,500
Net Profit in Alternative 2	$56,000
Net Profit in Alternative 3	$50,000
Net income would be highest under alternative 1 when
the sales price is increased by 10%
Computations for Soma Inn
Breakeven point = Fixed Costs / Contribution per unit
Computation of Contribution per room
Contribution = Revenue - Variable Costs
Sales - Revenue per room	$60
Less: Variable Costs
Maid Service	$8
Other Costs	$34
Total Variable Costs	$42
Contribution per room	$18
Computation of Total Fixed Costs per month
Salaries	$8,800
Utilities	$2,700
Depreciation	$1,300
Maintenance	$700
Total Fixed Costs per month	$13,500
1.
Breakeven point = Fixed Costs / Contribution per unit
Breakeven point = $ 13,500 / 18
Breakeven point in rooms = 750 room nights
2.
Break even point in sales = Breakeven point in rooms *
Revenue per room
Break even point in sales = 750 * $ 60
Break even point in sales = $ 45,000
Margin of Safety = Actual Sales - Break even Point
Computation of Actual Sales
Average Rooms Rented per day	50
Number of Days	30
Total Rooms Rented during the month	1,500
Computation of Actual Sales - Revenue from Room Rent
Total Rooms Rented during the month	1,500
Room Rent per night	60
Actual Sales - Revenue from Room Rent	90,000
Breakeven Point in Sales	45,000
1.
Margin of Safety = Actual Sales - Break even Point
Margin of Safety = $ 90,000 - $ 45,000
Margin of Safety = $ 45,000
2.
Margin of Safety Ratio = Margin of Safety / Actual Sales
Margin of Safety Ratio = $ 45,000 / $ 90,000
Margin of Safety Ratio = 0.50
Margin of Safety Ratio = 50%